PayPal’s stablecoin opens door for crypto adoption in traditional finance

Global payment processing giant PayPal announced its United States dollar-pegged payment stablecoin called PayPal USD (PYUSD) on Aug. 7. 

The stablecoin is developed on Ethereum (ERC-20) and will be issued by Paxos Trust Co. PYUSD is reportedly fully backed by U.S. dollar deposits, short-term Treasurys and similar cash equivalents.

PayPal said that the launch showcases the company’s focus on becoming a crypto payment giant and aims to make the stablecoin a key part of its payment infrastructure. PYUSD is currently being rolled out for selected customers in the United States.

The payment technology firm first confirmed its plan to launch a stablecoin in January 2022, nearly two years after it had made way for users in the U.S. and the United Kingdom to buy, sell and store cryptocurrencies in their PayPal accounts.

PYUSD will be primarily used for remittances as well as a mode of payment for millions of PayPal merchants. The firm noted that the new stablecoin will be made available on Venmo in the near future, where users will be able to transfer it between the two platforms. The stablecoin will also be transferable with wallets that support PYUSD, such as Coinbase Wallet and MetaMask.

Another stablecoin enters the market

The crypto stablecoin market cap is $125 billion at the moment, primarily dominated by two players — Tether (USDT) with a $86.5-billion market capitalization followed by Circle-issued USD Coin (USDC) with a $26-billion market cap. The rest of the market share is taken up by the likes of Binance-supported stablecoins such as Binance USD (BUSD), TruUSD (TUSD) and a few others. While there are several stablecoins players in the market, PayPal’s stablecoin will be the first issued by a major payment processor.

The launch of PYUSD was welcomed by most of the current stablecoin market leaders, including Tether chief technology officer Paolo Ardoino, who told Cointelegraph that the new PayPal stablecoin will lead to healthy competition and offer users a wider choice, adding:

“We all have the shared goal of driving stablecoin adoption and innovation, and competition leads to the development of solutions that enhance the overall ecosystem. Each project strives to differentiate itself by providing unique benefits to users, driving innovation and providing users with more choices and control over their transactions. Fostering competition allows a healthy and diverse market environment.”

Centralization and “freeze” function controversy

Stablecoins were initially created in the crypto market as an on-ramp method allowing users to get access to a wide range of crypto assets. However, the role of stablecoins has since expanded, with many of them now acting as key liquidity providers for exchanges as well as hedge assets during tumultuous market conditions. 

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The PYUSD launch was widely celebrated as a net positive for the crypto industry but came with its fair share of controversy.

Crypto Twitter was quick to critize the centralized structure of PYUSD, which — among other things — allows the owner to to pause transfers and freeze addresses and also allows admins to increase the stablecoin’s total supply.

So the PayPal stablecoin contract:
– Is written in an extremely old version of Solidity
– Allows the owner to pause all transfers
– Allows the owner to freeze addresses to prevent actions
– Allows admins to increase the total supply at will

Centralized, but transparent at least. pic.twitter.com/VJ3Jgj1SJ3

— cygaar (@0xCygaar) August 7, 2023

Although the code repository became a hot topic on social media platforms, many other market-leading stablecoins, be they Tether or USD Coin, all have similar features encoded in their system. These very same controversial features have often been used by other stablecoin issuers to freeze the funds of scammers and hackers. 

Kene Ezeji-Okoye, co-founder of digital infrastructure firm Millicent Labs, told Cointelegraph that such centralized features are required for any stablecoin to be regulated. He noted that PYUSD is issued by Paxos, which holds New York state’s difficult-to-obtain BitLicense and has issued its own stablecoin. He said:

“The beauty of crypto is that anyone can choose which type of assets they want to use, but given that 94% of all stablecoins are centralized, the market has given its view as to the model most people think is safest.”

Michael Quintanilla, director of Web3 and blockchain software firm SoftServ, believes that PayPal’s ability to modify PYUSD balances is critical for regulatory and operational purposes. 

He told Cointelegraph that there are various instances where these aspects come in handy: “For instance, should an account engage in illicit activities, PayPal may need to legally adjust or freeze its funds. Similarly, unusual transactions, like unexpected large transfers, can be halted or reversed to prevent potential fraud. Operational errors leading to incorrect PYUSD distributions can also be rectified to uphold trust and the coin’s stability.”

Legal uncertainty for stablecoins in the U.S.

PayPal entering the stablecoin market also raises hopes for clearer regulations for cryptocurrencies in the U.S. — many in the crypto industry have claimed that current regulations are outdated and unclear, making doing business difficult.

PayPal has stated that one of its key ares of focus will be to work closely with regulators.

With the growing popularity and expanding market cap, stablecoins have also become a key topic of discussion among policymakers in the United States. Over the past year, stablecoin issuers have faced significant regulatory scrutiny in the U.S., especially USDC issuer Circle, whose CEO blamed unwarranted regulatory pressure for their declining market cap.

USDC was seen as a key rival to USDT with a market cap of $56 billion at its peak. However, since the banking crisis and USDC’s depeg, the stablecoin’s market cap has been cut nearly in half, currently sitting just above $26 billion.

U.S. lawmakers are currently working on a bipartisan stablecoin bill that proposes to make the Federal Reserve the key regulator tasked with formulating requirements for issuing stablecoins while granting state regulators powers to oversee the companies issuing the tokens. The stablecoin bill called the Clarity for Payment Stablecoins Act was passed by the Financial House Committee in July. 

At a time when stablecoin issuers are facing regulatory heat, with the Securities and Exchange Commission going after the likes of BUSD and banning its issuance by Paxos, experts believe PayPal could turn the tide.

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Elitsa Taskova, chief product officer at crypto lending platform Nexo, told Cointelegraph that PayPal isn’t known for taking huge risks, which contrasts with Silicon Valley’s “move fast and break things” ethos.

“Crypto companies might see value in hitching themselves to PayPal and integrating PYUSD into their platforms, reasoning that PayPal is unlikely to cut corners in terms of compliance or rush its product to market,” she said, adding:

“Considering PayPal’s solid track record of scaling a successful and innovative business, their foray into the stablecoin market is likely to bring a wave of adoption for crypto and, specifically, stablecoins while also consolidating market share from the existing stablecoin leaders.”

Injective Labs CEO Eric Chen told Cointelegraph that PYUSD has the potential to attract a new set of both semi-crypto and non-crypto companies, stating that it could “resonate with a new segment of companies looking for a stablecoin solution that aligns with evolving regulations and offers a fresh perspective.”

The launch of the new stablecoin is being seen as the testimony to mainstream financial giants’ growing interest in the crypto ecosystem. PayPal, with over 400 million customers worldwide, could accelerate the stablecoin use and push for blockchain technology-based payment solutions in traditional finance.

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